The Fate Of SMSF Lending

The Council of Financial Regulators (CFR) is the coordinating body for Australia’s main financial regulatory agencies – APRA, ASIC, the RBA and The Treasury.

In 2014 the Financial System Inquiry recommended the removal of the exception from superannuation funds, allowing limited recourse borrowing arrangements (LRBA), more commonly known as an SMSF loan. In 2015, The Federal Government opposed the recommendation, however while acknowledging concerns about LRBA they did not consider the data sufficient to justify significant policy intervention.

While not accepting the recommendation, the Government commissioned the Council of Financial Regulators and the Australian Taxation Office (ATO) to monitor leverage and risk in the superannuation system seeking a report back to the Government in 2019. That report recommended continuance of LRBA’s and a further review to be completed in 2022.

The updated report of Leverage and Risk in The Superannuation System was made available in November. The report provides a comprehensive overview including:

• 95.9% of all LRBA assets are invested in real property
• By 2020, 11.8% of SMSFs have an LRBA in place
• Non-bank lenders accounted for around 36% of all lending to SMSFs in mid-2022, an increase of around 12% since late 2020.

The report also highlighted concerns including:

• SMSFs not meeting diversification standards, outlining that the ATO had communicated with over 17,000 SMSFs of which 98% had acquired property under an LRBA, advising them that there could be a $4,200 administrative penalty for failing to meet diversification standards, and;
• A focus and ongoing monitoring of property one-stop shops, where ASIC will continue to act on serious cases of poor quality and conflicted advice relating to one-stop shops.

The report concluded that while there is evidence that LRBAs represent a significant risk to some individuals’ retirement savings, borrowing by SMSFs through LRBA’s has not posed a material risk to the superannuation system or broader financial system. The report has stepped away from a three year review program, opting for an ‘as required’ review for the future.

Source: Bluestone